Corporate Sustainability Reporting (EU)

On 5 January 2023, the Corporate Sustainability Reporting Directive (CSRD) entered into force. This directive modernises and strengthens the rules concerning the social and environmental information that companies have to report. A broader set of large companies, as well as listed SMEs, will now be required to report on sustainability.

The first companies will have to apply the new rules for the first time in the 2024 financial year, for reports published in 2025.

Companies subject to the CSRD will have to report according to European Sustainability Reporting Standards (ESRS).

Today, 31 July 2023, the European Commission published the adopted ESRS as a delegated regulation. Link to delegated legislation.

The rules introduced by the Non-Financial Reporting Directive (NFRD) remain in force until companies have to apply the new rules of the CSRD. Under the NFRD, large companies have to publish information related to –

• environmental matters
• social matters and treatment of employees
• respect for human rights
• anti-corruption and bribery
• diversity on company boards (in terms of age, gender, educational and professional background)

The Q&A on the adoption of the ESRS is here. The European Sustainability Reporting Standards (ESRS) will be mandatory for use by companies that are obliged by the Accounting Directive to report certain sustainability information.

Note the modifications that the European Commission has made, as set out in the Q&A.

Note: CSRD and CSDDD sit alongside one another. A separate blog post concerns CSDDD.

Corporate Sustainability Due Diligence (EU )

On 23 February 2022 the Commission presented its proposal for a corporate sustainability due diligence directive (CSDDD). The proposal sets out obligations for companies regarding adverse impacts on ‘actual and potential’ human rights and the environment, with respect to their own operations, the operations of their subsidiaries, and the value chain operations carried out by entities with which the company has a business relationship. The proposal also includes penalties and civic liability for violations of the obligations.

France and Germany already have legislation in this area. Plus the Netherlands adopted a law in 2019 requiring enterprises to ensure they have no child labour in their supply chains. The French general due diligence law applies to large companies with over 5,000 employees in France and over 10,000 in the world. The German law on due diligence applies to companies with more than 3,000 employees (1,000 employees from 1st Jan 2024).

At EU level, rules on sustainable corporate governance have focused mainly on setting reporting requirements under the Non-Financial Reporting Directive (NFRD), as regards environmental, social and human rights-related risks, impacts, measures (including due diligence) and policies. The NFRD, which entered into force in 2014, was recently replaced by the Corporate Sustainability Reporting Directive (CSRD), which entered into force on 5 January 2023. The latter extended the number of companies covered by the NFRD (from 11 700 to around 50 000) and added sustainability reporting to the company due diligence process. The directive also introduced rules on principal, actual or potential adverse impacts relating to the company’s value chain (that is, its operations, products and services, business relationships and supply chain), as well as rules on actions taken, and the result of such actions, to prevent, mitigate or remediate actual or potential adverse impacts.5 The CSRD and the CSDDD are closely inter-related and complementary to each other. The CSDDD will also complement the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation, by imposing obligations on companies to provide data and information on risks within their value chains that are linked to the respect of human rights or environmental impacts. These data and information would be relevant for assessing environmental, social, and governance (ESG) risks, and for developing ESG investments.

The civil liability introduced by the CSDDD will also be complementary to the Environmental Liability Directive, which addresses a company’s operations not its supply chain.

In addition, CSDD complements Directive 2011/36/EU on preventing and combating trafficking in human beings and protecting its victims, the Employers’ Sanctions Directive, the Conflict Minerals Regulation, the proposal for a regulation on deforestation-free supply chains, the proposal for a new batteries regulation, the future sustainable products initiative (SPI), and the communication on the power of trade partnerships.

CSDD will introduce mandatory human rights and environmental due diligence (mHREDD), and a duty for directors to set up and oversee the implementation of due diligence and to integrate it into the corporate strategy.

Scope (Article 2). The new diligence rules would apply to the following companies and sectors: [these are now widened following adoption of amendments on June 1, 2023, by the European Parliament – see here for the amendments adopted.]

(a) EU companies (Group 1): all EU limited liability companies with 500+ employees and €150 million+ in net turnover worldwide. [widened]

(b) EU companies (Group 2): other limited liability companies operating in defined high impact sectors, with 250+ employees and €40 million in net turnover worldwide. For Group 2, rules will start to apply 2 years later than for group 1. [defined high impact sectors dropped and the thresholds altered]

(c) Non-EU companies active in the EU, with a threshold for turnover generated in the EU aligned with Group 1 and 2.

The Annex sets out the adverse human rights and environmental impacts in scope.

Articles 4-10 set out compliance requirements. Article 11 is a public communication requirement. Article 15 is a climate change obligation. [These are also altered by the amendments adopted by the European Parliament.]

The draft CSDDD will now be subject to negotiations between the EU Parliament and Council, with an agreement expected by the end of 2023. It is expected that 2026 will be the first year wherein EU companies meeting the threshold of employees and turnover would be required to comply. International companies with the relevant EU turnover are expected to be required to comply with the regulation by 2027.

Carbon Border Adjustment Mechanism (EU )

The EU’s carbon border adjustment mechanism (CBAM) entered into force on 16th May 2023 and will apply from 1st October 2023, with the first reporting period for importers ending 31st January 2024.

The reporting obligations and information sought from EU importers of CBAM goods, as well as the provisional methodology for calculating embedded emissions released during the production process of CBAM goods will be further specified in an Implementing Regulation to be adopted by the Commission after consulting the CBAM Committee, made up of experts from EU Member States. This document is expected shortly.

The EU’s CBAM will initially apply to imports of certain goods and selected precursors whose production is carbon intensive and at most significant risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen.

During this period, importers of goods in the scope of the new rules will report greenhouse gas emissions (GHG) embedded in their imports (direct and indirect emissions), and not make financial payments or adjustments. Indirect emissions will be covered in the scope after the transitional period for some sectors (cement and fertilisers), on the basis of a methodology to be defined in the meantime.

The draft Implementing Regulation on reporting requirements and methodology provides for some flexibility when it comes to the values used to calculate embedded emissions on imports during the transitional phase. During the first year of implementation, companies will have the choice of reporting in three ways: (a) full reporting according to the new methodology (EU method); (b) reporting based on equivalent third country national systems; and (c) reporting based on reference values. As of 1 January 2025, only the EU method will be accepted.

Importers are asked to collect fourth quarter data as of 1 October 2023, their first report to be submitted by the end of January 2024.

Once the permanent system enters into force on 1 January 2026, importers will declare each year the quantity of goods imported into the EU in the preceding year and their embedded GHG. They will then surrender the corresponding number of CBAM certificates. The price of the certificates will be calculated depending on the weekly average auction price of EU ETS allowances expressed in €/tonne of CO2 emitted. The phasing-out of free allocation under the EU ETS will take place in parallel with the phasing-in of CBAM in the period 2026-2034.

Find the EU’s Q&A here.

Find the EU’s CBAM Regulation here.

Find the EU’s Factsheet here.

Extended Producer Responsibility (UK)

UPDATE (27th July): it is confirmed “EPR for packaging fees have been deferred for 1 year. Fees were starting in October 2024. They will now start in October 2025.”

It is widely reported the UK Government has pushed back the fees payable for UK’s Extended Producer Responsibility (EPR) scheme (packaging) until October 2025.

However, the text here does not specify this, despite the wording of the update.

We will update this post online once the matter has been clarified, expected Friday. We will not issue a new blog post on the matter, so check back to this post online.

Note: data reporting obligations exist for 2023, and these timelines are not altered.

New EU Machinery Regulation (EU)

EU Regulation 2023/1230 is enacted and will replace the existing EU Machinery Regulation from 14 January 2027.

Regulation (EU) 2023/1230 is here.

The 2023 Regulation introduces new safety requirements for autonomous machines, human-machine collaboration and, for the first time, the safe use of Artificial Intelligence systems in machinery.

It will also permit digital formats for user manual instructions.

Annex III sets out the essential health and safety requirements in the new EU Regulation.

Products placed on the market in conformity with Directive 2006/42/EC can continue to circulate on the EU market up to 14 January 2027.

The EU Machinery Regulation is a retained document under the Northern Ireland/Ireland Protocol, and applies in Northern Ireland. The new document will apply in Northern Ireland, unless the Government in that jurisdiction is up and running, whereupon the Stormont Brake will require a vote on its adoption.

REUL Bill is now an Act (UK)

I refer to previous Blog posts on the subject. The REUL Bill gained Royal Assent yesterday and is published – here. Explanatory notes are not yet published.

Votes taken for non-Government generated Bill insertion and changes, reported in the last REUL Blog post, were not accepted by the UK Government. Accordingly, the Act does not create new or different parliamentary scrutiny mechanisms.

A couple of items to note:

(1) The Act gives powers for national authorities to Revoke or Replace up to 23 June 2026. Accordingly the List of EU-era Laws in Cardinal Environment EHS Legislation Registers & Checklists will stay in its long form until that date has past.

(2) The UK Government’s dashboard (of EU-era Laws) (which isn’t complete) will be continued, updated, and reported on regularly. This does not mean that at any time that dashboard will be complete.

(3) The UK’s link to the (continuing developing) EU law context for the UK’s EU-era Laws will be severed at the end of 2023.

(4) From 1st Jan 2024, EU-era Law will be “assimilated” law, but subject to the continuing Revoke and Replace possibilities until 23 June 2023.

(5) The UK’s EU-era Law is those documents fossilised as at 31 December 2020, and where EU law has continued to develop after that date, divergence has already occurred.

(6) The Northern Ireland Protocol retains listed EU law (AND their amendments AND replacements) in Northern Ireland. The Windsor Framework allows some British regulated goods to move to Northern Ireland in a “green lane” scheme, even if divergent from EU regulated goods also circulating in Northern Ireland. “Not for EU” labelling applies to all UK goods in those categories, not only the goods moved to Northern Ireland.

(7) We will be adding a section in UK Email Alerts to subscribers, to notify of divergence aspects.

(8) The REUL Act lists a few items of EU-era Law (EHS Law) for deletion by end of 2023, these are identified in the List of EU-era Law in Cardinal Environment EHS Legislation Registers & Checklists. Changes to this List of EU-era Law will be notified in Email Alerts to subscribers, PLUS identified on the List itself.